TXU Sets Record In Cautious Debt Market

By Michelle Sierra Lafitte

Pricing the largest high-yield deal ever is an impressive feat, but even more so when a market is on shaky grounds. TXU Corp., the Texas utility renamed Energy Future Holdings, did just that as it successfully issued a $7.5 billion three-part bond offering to help finance the $45 billon buyout closed last month by Kohlberg Kravis Roberts & Co., TPG Capital and GS Capital Partners.

It helped that covenants on the deal were attractive. One covenant bars the new owners from paying out a dividend until leverage comes down to an unspecified level, according to one investor in the debt package.

Until the take-private of Candian phone company BCE closes later this year, the TXU buyout stands as the largest ever, and the bond deal surpassed the previous record holder, Freeport McMoRan Copper & Gold’s $6 billion issuance. Even in a weakening market, its size didn’t diminish demand; more than 200 accounts got in on the deal and allocations were tight.

Energy Future launched the deal on Oct. 15 as a $4.5 billion senior two-part offering through Goldman Sachs and Morgan Stanley, along with Citi, Credit Suisse, JPMorgan and Lehman Brothers. In addition, lenders marketed $7 billion of Energy Future’s B2 loan along with the first portion of its $16.45 billion term loan B.

Despite the jitters in the credit market, buyers liked what they saw in the utility, even though, post-acquisition, the company will have roughly $40 billion in adjusted debt compared with $12 billion before the buyout. “Investors are looking for concrete stories like TXU. Even though the capital structure might be stretched, its business is good,” said one portfolio manager who got in on the deal.

While most of the deal’s debt, including the senior notes, ended up selling at or close to par and in fact have traded up since going on the market, lenders were forced to take a small hair cut with the PIK-toggle notes, which were rated a lowly ‘CCC+’ by Standard & Poor’s. The notes allow TXU to issue new debt securities in lieu of making interest payments, essentially making default impossible. PIK-toggles, considered an extravagance of the last cycle, have disappeared from new issuances.

Lenders were able to sell off $2.5 billion in PIK-toggle notes, making it the largest such package priced. The notes were priced at a 2-cent discount to par.

Energy Future now only has $3.75 billion remaining under its bridge loan out of an initial total of $11.25 billion. The rest will be funded in the future with another $2 billion eight-year cash-pay senior notes and $1.75 billion of nine-year PIK toggle senior notes.

Michelle Sierra Lafitte covers leveraged lending for IFR, a sister publication of Thomson Financial.